The Remarkable Speech of William Lough Jr.

(The posting below is for the use of my participants in the Cowles-Fogg book club. However, if you’re a random visitor to my website, I certainly invite you to read this post. For the book club members, though, I’d ask you to consider whether or not Lough’s comments would have been persuasive if you’d been sitting in the audience back in 1907. Would you have gone out the next day and changed your stock market holdings? If so, what’s the clearest point of persuasion? If not, what is missing? The story of Lough’s speech is another exploration into leadership. How does a leader forecast? Regardless of your standing as book club members or not, I hope you enjoy the post below.)

Just days ahead of a stock market collapse on Wall Street in March 1907, New York University Professor William H. Lough Jr gave a stunning speech to a room full of bank clerks in New York City. Here are his remarks, entitled “Conditions Favorable to Panics,” as reported by an onlooker:

Almost all the factors that make for a crisis are now actively at work; I don’t mean by that that they have necessarily reached their culmination, but they are undoubtedly at work…These had been ascribed by the writers on economic subjects to three causes: That state of mind of the people of ‘speculative mania’; overproduction; and the disproportion of credit to the money that exists…There had been no crises previous to the great development of transportation, manufacturing on a large scale, and the elaborate extension of the credit system….there had been no crisis up to about 100 years ago, and that they had occurred since then about every seventeen or twenty years. The regularity of their occurrence was an argument against the theory of ‘speculative mania’ as a cause. Taking the six important crises in this country, England, and Germany, those of 1825, 1837, 1847, 1857, 1873, and 1893, previous to all but the last mentioned there had been an era of great prosperity, a marked increase in prices of commodities and securities, an increase in the loans of banks and a decrease in the metallic reserve. Finally, there came a demand for cash to support the large credit outstanding, followed by a money scarcity, and finally by a crisis. In the case of the crisis of 1893, the reserve in the banks was normal, but that in the US Treasury was not. The sum of $60M had been taken out of the government reserve to aid Wall Street in stopping a panic, and the government did not get its money back for six years. In the meanwhile the proportion of gold reserves to meet liabilities had gone down. Consider the following: these crises were generally, but not necessarily, preceded by a rise in the prices of everything; that production and exchange of merchandise often showed marked increase before a crisis, and that a crisis was frequently but not necessarily preceded by an abnormal increase in the credit outstanding. A final point was that invariably before a crisis the metallic reserve declines either absolutely or in proportion to the credit outstanding and that this one condition was absolutely essential to a panic.”